Question

Mustafa is saving to buy a house. His goal is $500000. The interest rate is 5% compounded annually, and his plan is to make deposits of $P at the end of every month for 6 years.

a) What is the effective monthly rate?

b) What is $P?

After 2 years, the interest rate changes to 5%.

c) How much money has he saved so far?

d) If he keeps on making the same monthly deposit, how much money will he have saved after 6 years?

e) If he still wants to save exactly $500000 by the end of 6 years, what should his monthly deposit be?

(Don't forget to include the future value of the money from part c)!)

Answer 1

Answer (a):

Interest rate = 5% compouned annually

Monthly effective rate = (1 + 5%)^(1/12) - 1 = 0.00407412==>0.407412%

Monthly effective rate = 0.407412%

Answer (b):

Future value = $500000

NPER = 6*12 = 72 months

Monthly effective rate = 0.407412%

P = PMT(rate, nper, pv, fv, type)

==> PMT(0.407412%, 72,0,-500000,0)

(calculate in Excel)

Answer (c):

Money saved after 1 year = FV(rate, nper, pmt, pv, type) = FV(0.407412%, 12,P,0,0)

( calculate in Excel) Money saved after 1 year

Answer (d):

Monthly effective rate = (1 + 5%)^(1/12)-1 = 0.407412%

If he keeps same monthly amount after 6 years = FV(0.407412%, 60,P,Money saved after 1 year,0)

If he keeps same monthly amount after 6 years ( calculate in Excel)